Bill Gross wows advisors at Morningstar conference, but not with good news

Investors better prepare for 15 years of financial repression and start looking outside the U.S. for better returns.

Any investors who sticks with treasuries will get skunked, says Bill Gross, Pimco’s co-chief investment officer who runs Pimco Total Return Fund from Newport Beach, Calif.

Gross offered his grim view on U.S. treasuries Wednesday as the lead-off keynote speaker at Chicago-based Morningstar Inc.’s annual conference. This year’s event, which kicked off on Wednesday and goes until Friday, has record-breaking attendance of 1,650 attendees and was held at McCormick Place.

But if they came to town looking for reassurance on bonds from the Bond King, they were destined for disappointment.

Frog metaphors

“You’re getting something relative to zero in returns,” he says about investors in treasuries. “Relative to inflation you’re getting cooked. You’re that frog that is getting cooked.”

Morningstar’s CEO Joe Mansueto says he agrees with his company’s keynote speaker.

“It’s hard to argue with Bill’s view,” he says. “With negative real yields on fixed income, it’s penalizing the saver and rewarding the borrower. What do you do about it?”

Gross urged investors to turn to other countries for fixed income investing such as Germany and Brazil where higher interest rates give investors a better opportunity to get superior returns.

“The fact that real interest rates have come down to such levels is staggering,” he says. “What financial repression does it is takes money out of the hands of savers and puts it in the hands of debtors. The debtors become the favorite ones and it’s something we’re not used to.”

To show how bad it’s gotten in just the past three year, Gross pointed out that Treasury inflation-protection securities with a maturity of five years are getting a yield -0.5%, down from 4% in 2008. See: With inflation on a tear, 401(k) plans look vulnerable and BrightScope publishes a cheat sheet

Gross, who cut Pimco’s exposure to treasuries earlier this year points out that interest rates can’t go much lower. He says this financial repression has been caused by the dirt-low interest rates (which have also caused stocks to rise).

The low interest rates have created very little opportunities for investors who are looking for safety-nets in treasuries and bonds. The Federal Reserve has lowered interest rates in an effort to stimulate the economy.

“It has to be realized that in order to reinvigorate the economy you need to do something other than lower interest rates,” he says.

Government inaction

As part of its push to keep interest rates down, The Federal Reserve has also implemented programs such as purchasing some $600 million in treasuries, known as QE2.

But Gross says he doesn’t believe this program will extend into the third quarter — a problem because the government’s slashing of interest rates hasn’t done enough to boost the economy. Manufacturing, production and sales need to be boosted. This point was also made by the keynote, Neel Kashkari, the TARP chief, at another conference this week. See: Eavesdropping on a well-kept secret: the FPA NorCal event

He also predicts that this type of government-intervention has major consequences such as rising interest rates and, potentially, inflation. Those actions could further harm the economy, prevent job growth and hamper sustained real growth.

“We can’t keep going lower and lower without policy consequences,” he says. “This isn’t a freebie. The Fed does it with risk.”

Gross adds that if the Federal Reserve guaranteed they’d stay at 25 basis points for five years, he’d buy treasuries. “I mean who wouldn’t.”

Where to invest

Gross suggests that investors who want better returns should look overseas for better returns such as Brazil, Canada, Germany and Mexico.

He also suggests some solid blue chip stocks that often give dividends such as Proctor & Gamble, Pepsi, and Coca-Cola.

“The dividends they offer are the real interest rate,” he says. “It’d be better than -.5%.”

Advisors should steer investors to proven companies that will provide consistent and steady dividends.

Certainly, investing overseas carries with it more risk, Gross says. But he maintains that it’s important for investors to jump overseas or else they’ll lose dramatically investing in treasuries in the U.S.